Friday, November 27, 2009

I wrote about Dubai's real estate collapse in Feb 2009[Link]. I have a Malaysian friend who is there working as a business consultant and 2 months ago he wrote to me that he moved into a big mansion because rentals have fallen by more than 50%. If he loses his job in Dubai, he will just leave and go back to Malaysia. In fact that is what many foreigners working in Dubai have done in the past few months - they just leave without paying for property debt and car loans. Thousands of cars are left at the Dubai airport.

Yesterday, Dubai rattled global markets when it announced that it needed to reschedule its massive debt of US$80B. My instincts tell me that we will get over this one with a deal struck over the weekend. What worries me is actually what the market is not lookcing at manufacturing in Singapore is actually declining[Link] and the Chinese stimulus is masking many problems with its economy.

There is an important lesson in Dubai that is economic illusions can look really convincing. Just 18 months ago, Dubai announced it was about to build an skyscraper half a kilometer tall and a 2 years ago it was looked so impressive with its palm tree island and indoor skiing[Link]. They went on this strategy of growing their economy by attracting foreigners to set up shop and work there. Towards 2007, the large numbers led to a housing bubble and everyone was just flipping property and working as property agents. When the bust came, foreigners simply left and their banks and govt were left to hold the bag.

12 comments:

"There is an important lesson in Dubai that is economic illusions can look really convincing."

No matter what the marketing people say, perception alone is NOT reality.

http://www.nytimes.com/2009/02/12/world/middleeast/12dubai.html

Excerpt:

"No one knows how bad things have become, though it is clear that tens of thousands have left, real estate prices have crashed and scores of Dubai’s major construction projects have been suspended or canceled. But with the government unwilling to provide data, rumors are bound to flourish, damaging confidence and further undermining the economy.

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis."

To me, there are two important things to learn from the situation in Dubai.

1. Pretending that a problem doesn't exist won't make it disappear. In fact, impeding public discussion about the problems might have made things worse.

2. If an economy is heavily dependent on external factors and has no internal buffer to cope with big changes in the global economy, it can decline very quickly.

The question now is will such a "bust" situation occur in Singapore eventually? With so many HDB upgraders taking on massive debt to fund million-$ condos, are we also seeing some semblance of a bubble?

Singapore is different. We have huge reserves and the PAP is a competent govt.

Of course in economic downturn, some will suffer a lot but the majority will not. Because the govt is very much involved in the economy and this create ricebowls for many people, directly or indirectly.

Also many rich foreign talents also parked money here and can sustain the high property prices.

After all, how big is Singapore? Where got problem sustaining the prosperity?

Lee Kuan Yew in the UAE, April 29, 2007: "Dubai has the resources and visionary leadership to be one of the world's leading business hubs." Singapore's elder statesman said: "I'm greatly enthused by what's happening in Dubai. It's spectacular!"

Now we see exactly how. Zero transparency, uncontrolled hordes of foreign talent running the show, no checks and balances, and an unaccountable autocratic ruling class - does that sound familiar? And btw, PAP isn't a competent government, it's mediocre, as the $100b hole in our Reserves and LKY's remarks above ought to be warning you.

The question now is will such a "bust" situation occur in Singapore eventually? With so many HDB upgraders taking on massive debt to fund million-$ condos, are we also seeing some semblance of a bubble?

I leave it to readers to decide.

Cheers,Musicwhiz

27/11/09 13:15

I am in a fix whether to buy a flat now? Probably will rise in the next few years. So we actually do not have a choice...

Dubai is just like Iceland, countries which are walking on tightrope due to their excessive borrowings and now have to pay a price for their recklessness due to global deleveraging.If Iceland can survive, surely Dubai would too, not forgetting it has its rich neigbour Abu Dhabi to count on.

I don't see a debt bubble happening here, the govt has reined in the property bubble with more land sales, and don't forget our economy is dominated by GLCs, and unless they borrow recklessly, we shd be safe. With strong oversight on these GLCs, it is a remote possibility that GLCs would go down, though I don't rule out such a possibility in the future. However, since there is still deflationary pressure out there, it is unlikely there will be strong greed for borrowing any time soon.

But due to the smart money parking their money in Singapore properties (considered safe haven in such uncertain times), property prices are unlikely to come down soon. We would likely see property prices range bound at a general high level for some time. So for first time genuine buyers and could not wait, they shd look at their needs and do not over-extend their finances. The worst scenario is that you buy an expensive HDB flat/condo, interest rate goes up, you lose your job suddenly and cannot service the loan.

I forsee more ups and downs in the next 10 years due to the global balancing of power btw US, Asia and Europe, so expect volatility in asset prices to surface more often.

It's called an input driven growth. A country can grow its economy by getting a lot of foreign capital investment or importing a massive amount of foreign labor. But it's going to fall apart eventually if that's all it does.

It seems to me that they just woke up and discovered that Spore actually had the lowest productivity gain in the world.and now they claimed that productivity gain is crucial,as if they just discovered this.